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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

February 11, 2018 | It’s All Good

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The US stock market has shed 9% from its all-time high last month. Some people think it’s on sale now. Others believe it’s going to zero. All the attention this volatility has garnered proves one thing – we fear losses more than we crave gains. If you ever want to sell a book, newsletter, asset or service, just tell people everything’s going to hell. They’ll eat it up.

What happens next? The answer is below, but first we must put things into context. The context of a life. Alyssa’s life.

“I’ll start with the obligatory ‘I LOVE your blog’ comment,” she says, wisely, “(but I seriously do, I read it every day and have co-workers on the bandwagon now too). Truly, I find your posts to be informative, concise and witty, all while failing to cower to the comments section.”

Good. Now here’s her story.

“As almost 30 year olds, my husband and I are considered moisters and followed the home ownership ‘dream’. Then we sold in November 2016 to rent and were blasted for such a heinous crime and drop in social status by friends and family. Meanwhile, we had almost $100,000 in net profit that we invested. Fast forward to last month. New year, new us (figuratively). We decided to move back to Guelph (from a small town) and pay more in rent for somewhere we can walk to downtown and have more amenities. We were doubling what we were paying in rent before (we now pay $1,900 for an executive 3 bedroom across from a huge park within walking distance to work and downtown). Our friends were incredulous (yet again) that we were *gasp* “still RENTING?” Don’t you want to OWN? They’d cry at us while sobbing over their rising mortgage payments and freezing and bursting pipes in the basement.

“On top of renting a newly renovated, beautifully restored farm house style place, I decided to sell my car and lease. Cue more outrage and incredulous cries from friends and family of “didn’t you just get a new car 2 years ago?” – “shouldn’t you guys be focusing on saving so you can buy again when your lease is up?” (You get the gist). By selling my 2015 SUV back to the dealership and leasing a brand new 2018, I’m saving over $300 a month (and put $0 down, while getting a cheque for $2K from the dealership). You posted about this a while ago (leasing rather than owning a depreciating asset) and I am SO thankful you did!

“I’m also thankful for your constant posts about not putting all of your eggs in one basket (RE risk). My husband and I have come to truly believe that it doesn’t matter if the landlords are funding their retirement off our rent or if the dealership is making a premium off our payments. Because at the end of the day, it’s all about OUR cash flow (and ultimately savings). If I can lower our risk exposure and be spending less per month by making simple lifestyle choices, why wouldn’t we? We now just over $300,000 invested, living in a beautiful place, with limited risks and exposure, driving a new car and being able to walk to work. So remind me again why I would want to drop over $100,000 to move my stuff into a particle board new build on the outskirts of town with no services or amenities?

“Thank you again for ALL that you do. It is so honestly appreciated and you’re making such an impact. Whether you see it or not, please know we’re out here listening and altering our courses because of your constant education and encouragement (and wit too!). A.”

Could A & her squeeze have made some more net worth by climbing the property ladder instead of renting and investing the house money? Maybe. But does it matter? She has freedom, choices, liquidity, cash flow, wealth and time, while being free of debt and encumbrance. Is this not what youth is about? Alyssa isn’t stressed over about rising mortgage rates, B20, property tax, clogged gutters or being trapped in an illiquid property. And by eschewing the Big Smoke she can live a happy, affordable, life in a funky little city.

I’ll wager this, too: Alyssa doesn’t actually care that equities are lower than they were a month ago. That’s smart – it doesn’t matter to a 30-year-old, and it shouldn’t matter to a wrinklie, either. In the sweep of things, this correction is a dramatic non-event.

Yes, last week was the worst seven days for equity performance in two years. After hitting 70 all-time record highs in 2017, this year we’ve slumped back to where we were last November – which felt awesome at the time. Investors have been lulled into ever-higher valuations and, as with real estate, have unrealistic expectations.

The current volatility and price roller-coaster would only matter if we were heading into a bear market – which typically sees a 20-30% drop and lasts a couple of years. But that ain’t happening. The US economy is expanding just fine. Global growth is the best it’s been in eight years. Corporate profits are dazzling. Commodity prices are rising. No nukes are flying. Trump hasn’t blown up.

So, no recession. No bear. This is not 2008.

Having said that, stocks got too expensive, inflated, excited and toppy. Meanwhile central bankers have decided to nip all that stimulus they shoved up our wazoos for the last decade, bringing sharply higher interest rates and swelling bond yields. They want to curtail inflation, cool off investor horniness and let the air out of asset gasbags, like the Dow or your house.

Higher rates, higher wages, more inflation and rising debt yields are negatives for stocks because they increase corporate overhead while making equities less attractive compared to bonds. The financial gnomes and portfolio managers who obsess about this, because they have no life, figure there could be 5-8% more downside to come for the Dow or the S&P before stocks get too cheap to resist. Already P/E ratios (the price of equities in relation to what companies earn) are far more attractive than they were a few weeks ago. So if people liked owning them two months ago, they should like it again soon.

So, she isn’t selling. Or fearful. And grateful she’s not in a house with a mortgage about to renew higher while its value declines in an stagnating marketplace.

Alyssa’s greatest gift: contentment. How many among us possess this?

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February 11th, 2018

Posted In: The Greater Fool

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